Stockmarket turmoil as US bank flops

15 September 2008

The FTSE 100 has fallen below the 5,000 mark, hitting lows not seen for three years, in the wake of the collapse of Lehman Brothers.

The falls come a day after the US investment bank declared itself bust, resulting in Wall Street suffering its worst day of trading since 9/11. Although the UK stockmarket was fairly quite this morning, experts predicted that traders were waiting for the American markets to open.

And once they did, all hell broke loose, with share prices tumbling. The same effect is being felt across the globe, with Asian stockmarkets taking a hard knock following public holidays yesterday.

In the UK, banking stock has been particularly hit; HBOS has been named as one of the biggest losers, with nearly 30% of its value wiped off in wake of the crisis. In contrast, Centrica - the owner of British Gas - has fared relatively well.


The FTSE 100 plunged more than 40% after Lehman Brothers, one of Wall Street’s biggest names, filed for bankruptcy over the weekend.

Lehman Brothers, an American investment bank with operations across the world including the UK, has applied to the US Bankruptcy Court to wind down its business. Its board of directors says the action will "protect its assets and maximise value".

The bank was involved in discussions over the weekend with both the Bank of America and Barclays regarding a rescue bid, but has been forced to file a bankruptcy petition after these discussions collapsed.

Barclays says any rescue of Lehman Brothers would not have been in the best interest of its shareholders. However, it is now is discussions regarding the acquisition of some of Lehman's investment assets.

Meanwhile, Bank of America instead decided to buy another US investment bank, Merrill Lynch, in a $50 billion deal that will see the combined business become the third largest underwriter of global equity in the world.

The weekend’s events have had a traumatic impact on the stockmarket this morning, with the FTSE 100 opening 2.5% down and falling further in the early hours of trading on Monday.

UK banks took a particular battering, with HBOS’ share price falling by 40% at one point. Meanwhile, Royal Bank of Scotland and Barclays saw their share prices plunge by 15% and 16% respectively, Lloyds TSB by nearly 8% and Alliance & Leicester by 4%. Bradford & Bingley and HSBC both suffered marginal falls of around 4%.

The Financial Services Authority says it is working with market practitioners, including the London Clearing House, to ensure Lehman Brother’s bankruptcy process is completed "in an orderly manner to minimise any market disruption".

Simon Denham, managing director of Capital Spreads, says the banks willcontinue to suffer this week, as investors and depositors worry abouttheir financial stability.

“While many readers might like to smile at the woes of the financialinstitutions, they should remember that the prosperity and fiscalcertainty of the global economy depends upon the banking system,” headds. “If the current problems continue and more banks fail thencompanies with cash on deposit will lose it, loans will be called inand no new lending will be forthcoming (there can be no real growth andwealth creation without lending).”

The collapse of Lehman Brothers, the latest casualty of the creditcrunch, does suggest that the economic troubles facing globaleconomies, banks and consumers are far from over and that there isworse to come.

On one hand, Denham says that Barclays’ rescue package, despite ultimately failing, does offer a glimmer of hope.

However, he adds: “The fact that Barclays has felt rich enough to evenconsider taking on the Lehman disaster, might seem a vote ofconfidence, but investors should note that this was before theyrealised that there was to be no Bear Sterns Fed giveaway this time.”

Are British banks safe?

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